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U.K. Watchdog Softens Mortgage Rules for Existing Borrowers

Banks won’t have to apply tougher mortgage rules to existing customers after the U.K. financial watchdog softened proposals designed to rein in risky lending practices.

Lenders may “waive some of the proposed affordability requirements for existing borrowers,” the U.K. Financial Services Authority said in a review of mortgage regulations published today. The FSA is seeking views on the rules, which would ban issuance of any new self-certified mortgages.

The rules “were in danger of locking creditworthy borrowers out of the market,” Paul Broadhead, head of mortgage policy at the U.K.’s Building Society Association, said in an e-mailed statement. “Lenders will be able to take into account borrowers repayment performance rather than a prescriptive set of income and affordability criteria.”

The FSA has proposed plans to rein in the U.K.’s 1.2 trillion-pound ($1.87 trillion) mortgage market, blaming some lending practices for exacerbating the banking crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008. The watchdog is seeking views on the proposals for the seventh time since the review began in 2009.

The deadline for input runs until Mar. 30, 2012, and the FSA is due to release the final version of the rules later next year. The full set of reforms are to be implemented in 2013.

The regulations require lenders to assess the impact of rising interest rates in their mortgage-approval calculations and ban interest-only mortgages in cases where the borrower would have to rely on rising house prices to repay the loan.

“These are common sense proposals which serve the interests of both lenders and borrowers,” Adair Turner, chairman of the FSA, said in an e-mailed statement. “Borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever.”

The Bank of England has kept benchmark interest rate at a historic low of 0.5 percent since March 2009 to counter the effects of the global financial crisis.

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